Foreclosure Confusion

I am confused by the constant comments I read that people who owe on their mortgage can’t renegotiate with the mortgage holder the terms of their mortgage to make it more affordable and avoid foreclosure.  Just this morning there was another article about that.  It is said that the mortgage was made by the bank but then sold to someone else who in turn securitized the mortgage and resold that interest to investors around the world.  They act like it is a Gordian Knot that can’t ever be broken.   The bank that originated the loan almost always retains the “servicing” duties on the loan.  That is they collect the payments and assure compliance with the terms of the loan and is the entity that does the actual foreclosing on the loan when there is a default but as an agent, not the note holder.   The homeowners and the banks seem to believe that there is no way to negotiate with the true owner of the mortgage.  That doesn’t make any legal sense.

The laws regarding real estate are state laws of the 50 states.  When you buy or sell real estate or mortgage real estate it is state law that determines the transaction.   In some states we don’t really have “mortgages” but rather have deeds of trust issued to the lender against the property.  Some states are “title” states and others are “lien” states.   But the essence is the same.   I will keep this simple but the basics of the law regarding ownership of land and granting a mortgage against that land are essentially the same throughout the US.  For purposes of this discusssion we will use the phrase “mortgage” even though it might really be a deed of trust.   The procedures vary a great deal among the states regarding property conveyance and lien interests against real estate but the fundamentals are quite similar due to our common heritage under the Common Law of Anglo-Saxon England which in turn is mostly our law of the land here.

If you buy or already own real estate you may give a mortgage on it to  A (a bank or an individual).  That means they have a lien against the property.  You own it and can sell it or do with it as you please as long as you pay the note that supports the mortgage.  A’s interest in the land is only contigent upon your default.   Now A  could sell an interest in the mortgage you gave him to B.  That could be an outright assignment of the mortgage or just an interest in the mortgage.   Remember that under any state law we are talking about a debt instrument (note) to support the mortgage.   There are always two critical documents–the note you sign for the price you finance to by the house and then the mortgage to grant the security interest in the real estate in the event of default on that note.  The sale buy A to B will actually be an interest in both documents because the mortgage without the note is pointless.   Now that sell between A and B could be a personal contract between the two of them and most likely would be.  That is if A collected your money on the note but did not pay over B’s share to him then B could sue A for his share of the money due on the note.   The note is critical because more often than not it is a default on the note that causes a foreclosure.  

Under all state laws there are rules concerning the ownership, assignment and rights of note holders.   The Uniform Commercial Code is controlling in almost all states and if not there are still laws covering these matters.   When there is a default that noteholder brings the action to foreclose.  It varies from state to state in that in some they have to bring the action in court and in others they can proceed with a private foreclosure  through notice to the obligor (you) on the note.   There has to be a noteholder and a default on the note for there to be a foreclosure.   There can be non financial defaults under a note or mortgage but those are so rare that we will ignore them for this discussion.   Only, the noteholder can bring that action for foreclosure.  That is a critical matter.   The bank that is serving as an agent for the real owner may have the right under the agreement with the note owner to bring the action but there still has to be a real, honest to God owner of the note.   I keep reading that is impossible to tell who the owner is because of all the daisy chain sales and resales of the original mortgage or interests in the mortgage or security interest in a partnership or whatever that bought an interest in the mortgage.

If under our example above B has only a contract right between himself and A regarding your mortgage then only A, and only A, has the right bring a foreclosure action in the event of default under the note.  B has no standing in the matter because he is not the note holder.  He may have rights against A but not you the original maker of the note.  There can only be one noteholder at a time.  That one note holder could be a partnership or whatever but there can be only one legal entity.  If you are noticed for foreclosure you have the right to go to court to challenge the action.  The method of doing that will vary from state to state but you will have that right in some form.  You can always challenge the claim that the foreclosure is invalid because the true note holder is not bringing the action.  It is only the note holder of your mortgage that can bring the action to foreclose on your property.  If you challenge the foreclosure then the bank that is the servicer (agent) will  have to reveal in court who the owner of the note is and will have to document the correctness and legal viability of the transfer(s) of your note to the ultimate note holder who has to be the entity or person bringing the action against you.  You can’t be foreclosed on by “ghosts” under any state law.   You would at least know who the owner is and who to talk to about your note and redoing its terms.  The bank would also have to reveal in court the extent and nature of the terms of its agency agreement with the note holder to bring the foreclosure action in the first place.   An  agent is controlled by its agency agreement and has to receive intstructions from its principle to take any action or already be authorized under the agency agreement to take foreclosure action.  The bank’s actions are confined to the terms of its agency agreement and that agency agreement must be with the actual owner of the note.   If the bank doesn’t have an agency agreement with the note holder then it has no right to take any action on the note in question.  Point is that investors be they individuals or other legal entities in these crazy securitized mortgage bundles can’t foreclose on you; only the legal entity that is the actual note holder can make a claim under the note and mortgage and you can find out who they are in the court system.  Even in bankruptcy court the true note holder has to step forward to foreclose under Section 506 of the Code.

I have glossed over many, many legal details here to keep this within some reasonable limit but the basics of this analysis I believe are correct under applicable real estate laws and rules of evidence in most courts.   The best evidence objection would aid the homeowner in many cases  I don’t intend this to be a legal research paper or legal advice.  These are the observations of a very frustrated American.   Our fundamental real estate laws haven’t changed.  What changed was the investing community’s  crazy quilt schemes for  selling interests in mortgages.  Sometimes it is very good to go back to basics.   The schemes for selling those interests are indeed apparently quite arcane and complex but the fundamentals of real estate law didn’t become more complex in the last 10-15 years.    You  can smoke out the owner of a note that is being foreclosed.   Those investments in mortgage securities, securitized collateral instruments, etc, may be very complicated and hard to value and all of that, but the procedures for foreclosure and protection against wrongful foreclosure are not that complicated.  You have the right to know exactly WHO is foreclosing on you.   After all if it is the wrong person foreclosing  then you have been defrauded because the true note holder didn’t get the money  he is due and you would still  owe him.   That is why it is the obligation of the “plaintiff” in a foreclosure action to have to be the noteholder and have to step forward.  

Enjoy the ride no matter the scenery.  It is the only ride you get and the scenery will change if you will be patient.


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